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Growing Charities Need Sound Budgeting System
Growing Charities Need Sound Budgeting System To Manage Commissioning Risks
All too often, small charities are too focus building their core products and services, whilst oblivious of the risks they are exposed to due to insufficient financial controls and managements systems. In today's economic environment, which is dominated by many challenges, one cannot emphasise enough the importance of sound financial management systems , as a way of reducing exposure such as overspending, misappropriation of funds and unlawful use of business resources.
With the government encouraging the public sector to award contracts to small business including charities, a cynic may question whether this is just another futile dream to support the recent cuts in budget inorder to balance the books using cheaper services from alternatives such as charities. The key question trustees and CEOs of charities need to ask is this, do small charities have the business skills and management systems to take on board these opportunities, where they exist. Just because a charity has a track record and experience in delivering a product or service does not automatically mean it has the financial capacity and solid business management experience and systems in place to support aspirations for growth through public sector contracts. Small charities in particular need to improve their business skills if they are to be effective in the commissioning market place of the 21st century. Gone are the days when handouts through grants and free basic training courses were dished out to charities irrespective of the quality of services they provide. With public sector budgets being slashed and very tight, charities supplying goods and services as part of a public sector contract need to be financially astute and that means having the right systems in place to manage resources efficiently and effectively. Trying to expand using outmoded systems and practices that were suitable when the organisation started, carries a serious risk to both the provider of the products and services, as well as the buying organisation. It is with this in mind that this article seeks to provide tips on how budgeting systems can help small to medium sized charities in particular improve their financial performance whilst attempting to grow through contract opportunities.
Budgeting being defined as a plan quantified in money terms, should be integrally linked to the strategic objectives of any organisation. It must never be perceived as an isolated operational activities, although some small charities and businesses alike never make this connection. It is at this point the first major mistake is made and one that a CEO and Trustees of charities should be minded of. Misperception of the purpose of budgeting comes with a price. The price being that managers attitude towards budgeting will be laid back at best and cavalier at worst. I can confidently say that budgeting as a planning and management tool will only work when it is supported by three additional systems- monitoring, decision making and control system. For now we can look at some of the challenges of planning and monitoring and how to overcome them.
At the heart of the process is the importance of setting enough time to produce a meaningful budget. This is because budgeting requires collaborative team working in the planning and forecasting stage. Not setting enough time to do justice to a budget always result in generating budget figures which are devoid from the reality and moreover, cannot be explained easily during the monitoring stage. No one know what will happen in the future, however, as a serious manager one must be able to explain the assumptions underpinning a budget at some later stage. Always remember that sufficient time must be set aside for budgeting if it is to add value subsequently to the organisation. For budgeting to be effective as a tool for improving finances of an organisation, it must be approached with the right mindset which reflects its purpose.
The trustees and board members, paid or unpaid, must be skilled enough to ask the right questions before approving the budget. Moreover, they must ensure there is an effective system of accountability in the budgetary management system. Too much dependency on the treasurer to handle all financial affairs and ask all the questions at board meetings is a serious weakness. For that reason, steps must be taken to ensure the board is trained on the basics of sound financial management systems.
Budgeting without an effective monitoring system is fatal to the management system for improving financial health of the charity. What use is planning if it is not dovetailed by ab effective monitoring system to aid decision making. A well structured management accounting system should be put in place to ensure periodic reports are produced on time and consistently. This is vital to the process of maintaining financial viability of the charity. There is no one size fit all approach when it comes to designing the right management accounts system for any organisation. It is very much dependent on the nature and structure of the organisation and what it feels comfortable with. There is however one point that must never be overlooked-the reports should never be produced bi-annually because it leaves the charity little or no time to fix any problems that have occurred during the first six months of the year. So now you have the system, but does it mean it will all work as it should be - not really. There is the issue of presentation of the reports to the end users (i.e budget managers) who are accountable to the board for their actions. Management reports must always be user-friendly and the finance team should work collaboratively with non-financial managers to pull together a report in a format that is easily understood by them. If this does not happen, then the ability of the budget holders to manage their budgets effectively will be seriously undermined. One of the sad mistakes that some small charities make is not to invest in a proper management accounting system whilst at the same time seeking to grow through contracts with local authorities. This then leaves the charity exposed to all sort of financial leakages, the most common being overspending or income being lower than expected whilst expenditure continued in line with what was initially budgeted. If a contract is awarded to a charity, it is expected that they will be able to manage their resources to deliver the contracts on time and in line with specification within the budget. However, overspending carries the risk of putting the charity into the zone of insolvency unless of course it has reserves to meet the overspend. If this risk materialises, then there is even a greater risk to the public sector buying organisation, which is why they in turn need to ensure their contracts are not awarded to charities purely for financial reasons especially where the charity in question lacks sound financial management systems to support its business operations. The common problem of miscoding of transactions, can also be easily eliminated through training for budget managers on how the accounting codes are linked to each budget line. Failure to do so, will create all sort of management problems which can cost the financial health of the charity.
To conclude, budgeting as a management tool can help a growing charity to preserve good financial health. Care must be taken to support the process with a sound monitoring system to aid better decision making and control. Charities seeking expansion through public sector contract opportunities, should be minded of the risks of poor investment in financial management systems that can prove fatal to their financial health going forward.
Author of My Business Is My Business and MD of BSS Management Consultancy